Openfinance Insights

For sophisticated investors willing to take calculated risks, hedge funds can offer an attractive way to earn active returns while diversifying their portfolios. According to the SEC, there are currently over 9,000 hedge funds worldwide managing $3.6 trillion in assets. These funds pool resources from multiple investors to invest in a variety of related strategies, often betting that one security or sector will rise as another decreases in value. Getting both parts of the strategy right can lead to above-average returns for both the fund and its investors.

As the market for digitally formatted securities continues to grow, participants and observers are bandying around terms like “security token,” “digital security” and “crypto asset” to describe what’s happening in the space. That litany of descriptions can be confusing for both investors and issuers as they consider opportunities across the market.

For many up-and-coming businesses, venture capital funding can make the difference between sustainable growth and shutting the doors. Venture capital is a critical resource for early-stage companies, while investors willing to take a chance on these businesses can potentially reap above-average returns. As the startup ecosystem continues to grow, venture capital investment surged to a record-breaking $131 billion in the U.S. last year, with 2019 off to a similar pace.

Digitization makes perfect sense for issuers in the$8.8 trillion alternative asset space, where inherent inefficiencies have prevented both issuers and investors from realizing the market’s full value. The industry’s paper-intensive, manual and redundant processes have remained largely unchanged for decades, making it nearly impossible to buy and sell assets on the secondary market and ultimately depressing valuations for issuers.

Digital securities offer an efficient, modern alternative, enabling investors to buy and sell smaller stakes electronically in assets like real estate, private equity, and venture capital. For issuers, this approach can help them reach a broader market, boost valuations and streamline administration, all while meeting regulatory requirements. But while digital securities are a natural fit for most alternative assets, they’re not the answer for every situation. For issuers interested in the advantages of digital, here are three good reasons to pursue a digital listing.

1.Expanding access to more investors

For the most part, issuances in the private securities industry happen behind closed doors. Companies typically offer ownership in a real estate project or an up-and-coming startup to a select group of investors, shutting out those who don’t have an inside connection to the deal. Even if these investors knew the right people, most can’t come up with the capital to invest, with minimum investments often starting at $50,000 or higher.

Digital securities democratize this process by allowing investors to take part in deals that were once out of reach. More efficient distribution enables investors around the globe to buy and sell securities more easily, and a secondary trading market expands the number of people who can potentially own these assets. By breaking up larger assets into bite-sized units, digital securities also allow issuers to take on smaller investors more efficiently. While an investor might have once needed $100,000 to invest in a traditional real estate project, they might now be able to own part of the same deal for just $5,000.

For easily accessible assets like public equities, the benefits of enhanced access that comes from digitizing may not be meaningful, but for assets where investor access has traditionally been limited, like private securities, a digital approach can help issuers reach a broader pool of interested investors and achieve the liquidity that can lead to higher valuations.

2.Improving transparency to help investors make more informed decisions

Understanding private security performance can be a mystery for investors, thanks in part to infrequent business updates. For securities like REITs or venture funds that include multiple holdings, performance data on individual holdings is also often scarce. This lack of data often makes it difficult for investors to research and build a healthy, well-diversified portfolio.

Digital securities offer more transparency to investors by enabling them to see real-time market pricing, data that’s never been available for most of these these assets before. Based on each asset’s performance, investors can vet current and potential holdings to create a portfolio based on their individual needs. Since asset entry sizes are smaller, investors can also select assets based on the specific markets and properties they’re interested in. For example, rather than investing in a single REIT, an investor could spread a similar amount of funds among investments across multiple areas of the REIT market. This transparency also benefits issuers, who can use it as a key selling point to generate investor interest among those uncomfortable with less transparent products.

3.Increasing flexibility for investors

Traditionally, investing in an asset like venture capital or private equity often meant tying up capital for anywhere from seven to 10 years. If an investor needed to liquidate, they typically had to take a large discount — if they could find a buyer at all.

Thanks to their smaller increments and a secondary trading market, digital securities give investors more flexibility to buy and sell assets as their needs change. And while clearing and settlement can take weeks to complete with traditional private securities, the digital format offers cost-effective, frictionless transfer with near-instant settlement. For private securities issuers, these advantages can help improve investor satisfaction, keep them coming back for new offerings and boost asset valuations.

While digital securities can help facilitate liquidity, however, they don’t guarantee it. As the market matures, truly unlocking the value of digital securities willrequire a robust ecosystem of platforms and providers like Openfinance. For issuers whose goals align with the advantages of digital securities, the potential to transform their businesses is great.

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Securities are offered through Openfinance Securities, LLC, a registered broker-dealer and member FINRA/SIPC. Neither Openfinance Securities, LLC, nor any of its affiliates provide any investment advice or make any investment recommendations to any persons, ever, and no communication through herein or in any other medium should be construed as such. Securities offered on the Openfinance Securities, LLC ATS have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Assets listed herein are securities that are not publicly traded, may be subject to resale restrictions, and are intended for investors who do not need a liquid investment. These investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other governmental agency), are NOT guaranteed by Openfinance Securities, LLC or its affiliates, and MAY lose value. Investors must be able to afford the loss of their entire investment. Eligibility to buy and sell securities on the Openfinance Securities ATS is determined by Openfinance Securities, LLC in its sole discretion. Offers to sell, or the solicitations of offers to buy any security can only be made through official offering documents that contain important information about risks, fees and expenses associated with the applicable securities available for trading on the Openfinance Securities ATS. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed herein, and are encouraged to consult with a financial advisor, attorney, accountant, tax advisors, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. Past performance is not indicative of future results. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided herein or through any references/links herein. Any financial projections or returns shown herein are provided by the issuer of the relevant security and Openfinance Securities, LLC has not and will not perform any due diligence to confirm the accuracy of any information provided by any issuer. Further, there can be no assurance that any valuations provided by issuers are accurate or in agreement with market or industry valuations. Openfinance Securities, LLC and its affiliates make no representations or warranties as to the accuracy of such information and accept no liability therefore. Openfinance Securities, LLC may collect certain information about you that helps us comply with various securities regulations and rules and the USA PATRIOT Act, a Federal law that requires all securities firms to obtain, verify, and record information that identifies each applicant. The information also helps us more fully understand your investment profile and identify what types of investments or strategies may be suitable for you. Please note: if we cannot verify the information you provide, we may be required to restrict or deny your account. (Website only) By accessing this site and any pages thereof, you agree to be bound by our Terms of Service and Privacy Policy.
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